4.1.6 Restrictions on free trade

Question 1

Free trade

Answer 1

International trade without restrictions such as tariffs or quotas.

• Free trade provides benefits from specialisation, increased competition and the ability to transfer resources.

Question 2

World Trade Organisation (WTO)

Answer 2

An international organisation which provides a forum for its member governments to discuss trade agreements and settle disputes, using a set of trade rules.

The WTO currently has over 150 members, including countries with the biggest economies.
The WTO has many agreements its members must follow, including:

• Countries must treat all their trading partners, and foreign and domestic goods, equally.
• The WTO wants to encourage competitiveness and discourage trade barriers, such as subsidies.

Question 3

Reasons for protectionist policies

Answer 3

• To protect jobs
• To protect infant industries
• To ban certain goods
• To avoid overdependence
• To protect against dumping
• To correct imbalances in the balance of payments

Question 4

Why might governments use protectionist policies to protect jobs?

Answer 4

T might be a risk of too may job losses if domestic firms are outcompeted by foreign firms.

Question 5

Why might governments use protectionist policies to protect infant industries?

Answer 5

Industries that are just starting out, particularly in developing countries, struggle to compete with international companies. Governments might choose to impose trade barriers until the companies are big enough to compete. However, there’s a risk that the industry may never become truly competitive, and in the meantime, domestic consumers are stuck with higher prices or lower quality goods.

Question 6

Why might governments use protectionist policies to avoid overdependence?

Answer 6

Specialisation could lead to overdependence in one industry.

Question 7

Why might governments use protectionist policies to protect against dumping?

Answer 7

When companies sell goods abroad at a price that’s below the production cost to try to force other countries’ domestic producers out of business.

Question 8

Why might governments use protectionist policies to ban certain goods jobs?

Answer 8

The government may simply want to ban certain goods altogether because they consider them to be bad for society, e.g. firearms or drugs.

Question 9

Tariff and non-tariff policies that governments could use to protect domestic industries

Answer 9

• Tariffs
• Quotas
• Embargoes (bans)
• Reducing the value of the currency
• Tight product standard regulations
• Subsidies given to domestic producers

Question 10

How do embargoes (bans) act as a protectionist policy?

Answer 10

These are usually restricted to extreme cases, e.g. drugs or elephant ivory. But it may also be for political reasons, e.g. if two countries are having a disagreement, they might impose embargoes on imports from each other. Embargoes tend to be less about protecting domestic industries and more about politics or enforcing laws.

Question 11

How does changing the value of the currency act as a protectionist policy?

Answer 11

This raises the price of foreign imports and lowers the price of domestic exports.

Question 12

How does imposing tight product standard regulations act as a protectionist policy?

Answer 12

Foreign products which don’t comply with the requirements cannot be imported. Product standard regulations could include things such as high safety standards, or low emissions requirements. These might be used for environmental or consumer protection, or to help to protect domestic industries that can comply with the regulations.

Question 13

How does giving subsidies to domestic producers act as a protectionist policy?

Answer 13

A subsidy lowers the cost of production for domestic firms:
* They can increase output and lower prices.
* With lower prices their goods/services are more competitive internationally.
* The increased output may result in increased domestic employment.

Question 14

Trade disputes

Answer 14

These occur when one country or trading bloc is seen to be acting unfairly when trading internationally. Trade disputes might be caused by the use of protectionist policies – for example, one country may see the subsidies paid by another country’s government to one of its domestic industries as unfair.

Question 15

Tariffs

Answer 15

A tax on imported goods. It is sometimes called an import duty or a customs duty.

• Tariffs can be used by governments to raise revenue but are most often used as an attempt to restrict imports.
• When tariffs are imposed on a good, it raises its final price to the consumer, likely leading to a fall in demand and the volume of imports will fall.
• A tariff should also help domestic producers. Some consumers will switch consumption from imported goods to domestically produced substitutes following the imposition of a tariff. For instance, if the UK imposed a tariff on sugar cane imports, British-produced sugar beet would become more competitive and demand for it would rise.

Question 16

Quotas

Answer 16

A quota is a physical limit on the quantity of a good imported.

Imposing a limit on the quantity of goods imported into a country will restrict the supply of goods from abroad, thereby increasing the share of the market available for domestic producers. However, it will also raise the price of the protected product.

Question 17

Impacts of protectionism

Answer 17

Restricting imports reduces specialisation, diverting resources away from their most efficient use – this reduces allocative and productive efficiency.

Protectionism will mean prices tend to be higher (for both consumers and producers), as there’s a lack of specialisation and competition (and imports may be more expensive, e.g. through tariffs).

If the prices of everyday goods (e.g. food) rise, this will have a bigger impact on the poor than on the rich. As a result, there might be an increase in inequality, and it’s likely that living standards will fall.

Protectionism also reduces choice for consumers.

Once trade barriers are in the place, it can be difficult to remove them – industries may depend on them to survive, so removing them could destroy domestic industries.

If demand for imports is high, this could be due to poor domestic efficiency – a lack of competition doesn’t encourage firms to improve their efficiency, so there’ll continue to be a misallocation of resources. are likely to make more money, especially in the long run, if they improve efficiency instead of relying on protectionist policies.

Trade barriers imposed by one country may lead to retaliation by other countries – this is often referred to as a ‘trade war’. It reduces world trade, worsening other problems – e.g. there’ll be a further misallocation of resources caused by inefficiency and a lack of specialisation.